Trading Notes for Today, September 30th

Notes to Note: 

Last day of the third quarter and it looks as though the up and down trading is going to continue. If Monday was any indication of what is on the horizon take some Dramamine to avoid getting seasick. The intraday reversal off the early selling gave some hope to the buyers as investors were will to buy the downside of the Hong Kong news and weak pending home sales report. The geopolitical news rattle investors overnight and the economic data had influence after the market opened to add fuel to the fire. This is not an easy market to trade as we stated over the weekend. The progression of the volatility goes from 3-7 day reactions to one day reaction to intraday reactions. The faster the progression gets it eventually ends with a direction declared and it could be up or down at this point, but the bias is with the down currently. The data and confidence will ultimately determine the directional winners. Thus we have to remain patient and let this continue to unfold and then we will take the side of the trend.

I stated in the weekend update that there are three primary trading strategies most investors follow… Long-term (passive investing), short to intermediate-term (active investing), and trading (micro to short-term). Most investors will participate in all three or a combination of the three. Very rarely do they only select one style of investing. This in itself many times is the problem. We confuse strategies and time frames which feeds emotions, leading us to react to market events versus being proactive to managing our portfolio based on a defined strategy. Throw in help from a “professional”, and it gets more confusing. Bottom line define what you want and then create a strategy to obtain it. Stay on course and when take a detour, clean yourself off and get back on the road you laid out. This is a journey not a destination.

What do we want? Currently a short term trend to establish itself. Once it does we will have to determine the strength and probable duration for the move. Then put in place a strategy to trade the projections and implement the strategy one day at a time. Sounds simple? It actually is, the challenge comes from the emotions and second guessing we allow ourselves to create in our minds. The short term is still a big question mark and we will let it unfold and then commit based on the outcome.

Some thoughts on news/events impacting investor psyche:

* Monday introduces some new geopolitical risk in Hong Kong. Watching to see how much impact this is in the global markets near term.

* Pending home sales unsettles the projections about the housing markets… again. ITB continued to stumble lower on the news.

* Syria bombing was added to the list of worries as Obama call for the elimination of the Islamic State. The attacks are having an impact on oil prices and we have to watch going forward.

* Tax inversion fight in Washington. While the immediate impact is of more interest to the tax implications, the longer term impact to mergers and acquisitions may have bad unintended consequences. I will not get into the issues stomping on the Constitution to enact this law. Three branches of government were created for balance, these decisions teeter on being a Monarchy or worse a Dictatorship. It will all be interesting to see how it unfolds, but at some point we have to return to a government of the people, by the people and for the people.

* Trading environment is compressing holding periods on trading positions again. Thus, the choppy markets are in play and we have to respect that relative to trading. Now we are down to one day moves in direction with increased volatility. Throw in the bubble warnings from analyst and it makes for fun times.

* Interest rates moving higher, maybe, possibly, potentially, someday… This is still a worry for investors.

* Clarity is the primary issue with stocks. Without the ability to forecast with some confidence investors react to news and worries which creates a choppy environment. You either hold through the chop with a longer term focus or you sit on the sidelines and await clarity to develop. The latter allows me to maintain my sanity and is my preference relative to short term holdings.

Sectors to Watch:

S&P 500 index broke key support at the 1978 level last Thursday and trying to hold that level in an attempt to keep the upside belief in play. Monday tested the low early and bounced back to close at 1977. The downside potential remains the 1910 level, but it could also make a renewed attempt to move back toward the 2010 mark. Short trade is SDS which we added in the Pattern Model below. I will look to add to that position today if we confirm the downside opportunity.

Bonds (TLT & IEF) as stocks retreat so do rates on bonds and bond prices rise. The choppy issues in stocks are now showing up in bonds. The uncertainty towards the Fed has bonds chopping around like stocks. The response to the Fed not moving on interest rates was a push lower in yields. TLT pushes to $116.93 on the long bond rally Monday. Watch to see how this bounce plays out. TODAY: Yields moved back below 3.18% on fear towards stocks and yields to decline again. That brings TLT back as a trade opportunity. This is as bad as stocks on direction currently.

Financials (XLF) Last week pushed below $23.10 intraday and showed some weakness in the sector on the move. The opportunity going forward is if rates rise. The outlook currently is rates will fall again on the fear in stocks. That puts financials on the defensive again and moving lower. Small bounce of Friday gave some hope, but still cautious currently. TODAY: Moving back toward the $23.45 mark, looking for direction and remaining patient.

Semiconductors (SOXX) solid move short term back near the previous high, but reversed and the questions started about the downside. Big reversal last last week and held the 50 DMA as support again. Needed to move above $88.50 to hold and that failed to materialize. TODAY: Held the 50 DMA and watching to see how this unfolds.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • S&P 500 Index (SDS) Made the break lower on Thursday and looking to add to the position if the Friday bounce fades again. TODAY: entry of $24.85 if we maintain a negative sentiment in the AM. If we move back below $24.45 we will wait.
  • Consumer Services (XLY) after a set up to break higher the sector broke support on the downside and the short term trade. The $67.60 mark was the downside break and added the short trade short term. Patience and let this unfold as the volatility plays out. (Pattern Trade Model)  TODAY: Follow through on the downside? pushing our stop to $67.75.
  • Energy (XLE) the weakness in the sector is expected as crude oil prices have declined. There is some volatility in prices, but the downtrend is well confirmed in oil and now in the energy sector. Added the short side trade (Pattern Trade) and managing the risk. The short trades with DUG on the stocks is an opportunity. (ONLY ETF Model) Remember bull cycles die hard and this will be the case in the energy sector unless oil finds an upside bid that reverses the trend. Watch the issues in the Middle East as they will have an impact on oil prices if worry gains traction. TODAY: Still looking for more downside short term.
Watch List Opportunities:
  1. Holding steady as we start the week and look for some definition on the direction versus getting whipped in and out of positions.

Pattern Trade Setups:

  1. FLIP — FLOP – Markets remain uncertain! The push to an intraday volatility is indication of the break coming soon… up or down. Bias is still on the downside and we have to manage the risk, but give some room for volatility.
  2. QID – entry $45.50. Add to position if the downside accelerates through support of 50 DMA. Add to existing position
  3. FAS – entry $105. Trade reversal test of the 50 DMA. Trade only on the upside on a reversal. High risk due to the volatility in play as could be 2-3 day positions for 3% move. Can cheat the entry if we open and hold above $104.05.
  4. UNG – entry $22.15. trading range breakout. Good base on the commodity and a breakout would be a trade on the upside move. Willing to add to the position on a positive test look longer term than trade.

Pattern Trade Tracking:

  1. QID – entry $44.65. Break above resistance off five week base. Stop $44.40
  2. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. (ADDED BACK Thursday) Stop $23.60
  3. XLY – Short entry $67.25. Breakout reversal. The downside is in play again as short term trade. Manage your risk as this is a short position. Stop $67.75.
  4. XLE – short entry $93. The downside opportunity remains in place and we will add a short position on the break below this level. Stop $95.50. Reversal candle sitting on the 200 DMA – watch to see if it confirms in the AM and manage the stop.
  5. TZA – entry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $15.40
  6. TKMR – entry $21.50. triangle consolidation. Upside continuation move on the breakout is good trading opportunity in leading sector. Stop $21. HIT STOP
  7. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
  8. AGN – entry $163.50. Test lower and move through resistance. drug manufacturer. Stop $163.50.
NOTE: The pattern trades above are setups that I see for a potential swing trade or short term trade opportunities. Some will fail to follow through on the pattern, some will break and trade according to the pattern. The key is to use discipline in the trades. Entry, Exit and Target on all trades is vital. I am posting these as opportunities that I see when doing scans daily. You can use them as a teaching tool or you can trade them, either way please use discipline. The best way to treat these as a learning tool is to assume a $100,000 portfolio and each positions receives a 5% allocation. If we state to take a 1/2 position as an example you would only allocate 2.5% to that position. I would use a downside risk of $500 per trade as a maximum loss. That will help  you learn position sizing and risk management. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.
Long Term Opportunities: 
Both positions held on in the storm Monday and Tuesday. Exercising some patience as the issue of the Fed unfolds. These are long term holdings and we don’t want to over react tot he short term news. If the short term volatility made any rationale sense we would trade the events, but they are too news and emotion drive for now. There will be opportunities on the other side of this and we will take advantage of that as it arises.
  • Facebook (FB) – Testing the break higher and has held up well in the recent choppy markets. $73.15 entry point to add 1000 shares back on the long term outlook. (see note page for history. ADDED shares on 8/7 – $73.15 — Stop $71.50. Nice slow upside drift in play for the stock. Still positive opportunity long term for the position.
  • Twitter (TWTR) – entry $45.50 1000 shares (last trade). This was recommended on our webinar as the next long term position we have been trading since bottoming in June. Adjust your Stop to $45 for now on position and we will make adjustments as we extend the upside.